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Introduction to Outsourcing

Over the last few years, the subject of outsourcing has caused a division between employees who see that this will lead to the loss of their job and management who believe that this will save their company significant amount of money. Somewhere in between those two views is the truth about outsourcing. In reality outsourcing is a job or process that can be performed by employees within your company, but is instead contracted to a third party, which can be located anywhere in the world, including the companies own site.

Benefits of Outsourcing

The main benefit of outsourcing that management want to exploit is a reduction in costs. Employees are expense for a company. There is the cost of finding employees, training, salary, benefits, pensions, 401k payments, insurance, and many other unseen costs. By outsourcing a job or a whole department a company can remove those costs and pay a fixed fee to have that job or function performed. If the function is not being performed to the level of satisfaction that is required, a company can either have the contractor removed, without worrying about severance or legal issues, or end the contact with the outsourcing firm. Of course, the company loses some control as the outsourcing company is the de facto employer of the worker and therefore there is less of a relationship and less loyalty from the worker to the company they are contracted to.

Another benefit that companies look for by outsourcing work is to have that work performed at a higher level than they could expect from their own employees. If a company is operating complex software or has a unique manufacturing process, they may not have employees who have the experience to be successful and instead of training existing employees or trying to hire new experienced employees, they can outsource the work to firms who have employees that have the necessary experience. When the company's existing employees reach the required level of experience, the contract with the outsourcing company can be terminated.

One reason that outsourcing is popular for many US companies is that they can remove some functions from the company to outsourcing companies so that they can concentrate on the core function of the business. Large companies such as banks or insurance companies may have tens of thousands calls from customers per day and to perform that task, a great number of employees were needed as well as the buildings to house them and the technology to operate such a function. In the US this is very expensive; wages, benefits, building leases, and technology costs. By outsourcing call center functions to companies outside of the US where labor and resources are cheaper, a company can focus on the core function of the business. Although call centers were one of the first functions to be outsourced to offshore companies, other business functions were also identified and followed the same path, such as accounts payable, information technology, accounting, marketing, and manufacturing.

Disadvantages of Outsourcing

Of course, outsourcing may be management's ideal scenario of saving their company's millions of dollars a year, but as with everything there is a number of downsides to the panacea of outsourcing.

Security is a growing concern for more American companies. The threat from competitors, foreign nations, criminals, as well as disgruntled employees, is a very real and protecting data is a major concern. Outsourcing core functions can weaken a company's security and management should carefully consider this aspect when looking at outsourcing.

Another aspect of outsourcing that can negatively affect a company is the public perception. If a company has thousands of complaints about outsourced call centers or incorrect billing, negative public opinion is very quickly communicated across social media. Company's who have outsourced many functions, especially to offshore companies, are not always perceived in a positive light by the American public, especially when tens of thousands of US employees have been laid off.

Loss of managerial control to the outsourcing companies is often forgotten but can be significant. If a company outsources their accounting department they are relying on that outsourcing company to have the same or better standards in maintaining the accounts. However, the outsourcing company has the goal to make as much money as possible based on the contract and their primary goal is not the accounts. This can lead to many problems that may not be identified until it is too late to correct.

Outsourcing jobs to a third party means that a company now is relying on that third party company to be successful. If it has financial issues or loses key employees, they may not be able to perform the functions they were contracted to do. If this is the case, a company may find that their call center is not operating or their accounts payable function is not paying vendors. Hiring an outsourcing company can be a costly risk if that outsourcing company fails.

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